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Dollar rises before expected Fed rate rise, euro zone bond yields up

[March 14, 2017] By Nigel Stephenson

LONDON (Reuters) - The dollar rose before the start on Tuesday of a Federal Reserve policy meeting expected to raise U.S. interest rates while euro zone government bond yields headed higher as investor nerves over an election in the Netherlands appeared to ease slightly.

Sterling hit an eight-week low against the dollar after the British government won parliamentary approval to trigger talks on leaving the European Union, reversing Monday's gains when Scotland's leader demanded a referendum on independence.

European shares dipped. Stocks in Asia had risen and Wall Street traded in tight ranges on Monday before the Fed meeting.

Traders were also looking ahead to Wednesday's election in the Netherlands, seen as a test of populist sentiment in Europe.

A poll on Monday showed Prime Minister Mark Rutte's conservatives taking 27 seats in the 150-seat parliament, three more than in the pollster's previous survey and slightly outpacing gains for nationalist Geert Wilders's Party for Freedom (PVV).

Wilders has advocated a referendum on the country's euro membership.

Yields on benchmark 10-year German government bonds <DE10YT=TWEB>, which are seen as among the world's safest assets, briefly hit 14-month highs above 0.5 percent.

Higher U.S. Treasury yields due to the Fed outlook, signs of recovery in the euro zone economy, and an easing of concern that the French and Dutch votes could bring populist, anti-euro leaders to power have pushed yields higher in recent weeks.

"At the start of this year yields were trending higher, and then there were escalating nerves about upcoming political risks that pulled yields back down. Now investors have revised these political risks somewhat and now we are heading back towards those yield levels seen in January," DZ Bank strategist Daniel Lenz said.

The dollar index <.DXY>, which measures the greenback against six other major currencies, rose 0.3 percent.

The euro fell <EUR=> 0.1 percent to $1.0640 while the yen <JPY=> fell 0.1 percent to 115.03.

Sterling <GBP=D4> fell 0.7 percent to $1.2129, having dropped as far as $1.2107, its weakest since Jan. 17.

A Fed rate rise on Wednesday is seen as all but certain and investors will focus on new economic forecasts and any clues to how many rate hikes can be expected this year.

While higher rates would raise companies' costs, they are also seen as evidence of economic recovery.

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Wads of British Pound Sterling banknotes are stacked in piles at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013. REUTERS/Leonhard Foeger/File Photo

"March’s Fed meeting, even if it does suggest that FOMC members want a faster pace of rate hikes, is looking unlikely to cause market panic, and instead we could see U.S. stocks actually rise on Wednesday night, and the dollar and U.S. yields retreat," City Index Research Director, Kathleen Brooks, said in a note.

EUROPEAN SHARES DIP

The pan-European STOXX 600 share index <.STOXX> fell 0.3 percent, led lower by a 0.8 percent fall in banks <.SX7P>. Sterling weakness helped Britain's FTSE 100 <.FTSE> gain 0.1 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.2 percent, while Japan's Nikkei <.N225> closed down 0.1 percent.

Shares in Toshiba Corp. <6502.T> closed up 0.5 percent after plunging as much as 8.8 percent, their biggest one-day loss for almost a month.

Toshiba failed to submit audited third-quarter earnings for a second time on Tuesday, gaining a one-month extension, and said it would speed up looking at whether to sell a majority of its U.S. nuclear unit Westinghouse.

China's blue-chip CSI300 index <.CSI300> dipped 0.1 percent after data showing investment was higher than forecast in the first two months of the year.

Oil prices held near 3-1/2-month lows hit on Monday on worries about a global glut of crude as investors awaited a series of reports on output.

Brent <LCOc1>, the international crude benchmark, traded 7 cents higher at $51.41 a barrel.

Gold <XAU=> was flat at $1,203 an ounce.

(Additional reporting by Nichola Saminather in Singapore, John Geddie, Jemima Kelly and Jamie McGeever in London; Editing by Louise Ireland)

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